How Collectibles Are Taxed
By DAN MOSKOWITZ
Updated May 04, 2022
Reviewed by LEA D. URADU
Investing in art and collectibles can be personally rewarding. As an owner of a historical or rare item, it’s emotionally satisfying to own a collectible item.
Investing in art & collectibles can also lead to significant returns. Unfortunately, due to the nature of the collectible industry and IRS regulations, collectibles are often assessed heavy fees and taxes. Let’s dive into how collectibles are taxed.
Art is considered alternative investments by the IRS and include things like art, stamps & coins, cards & comics, rare items, antiques, and so on.
If collectibles are sold at a gain, you will be subject to a long-term capital gains tax rate of up to 28%, if disposed of after more than one year of ownership.
Collectibles sold at a gain are subject to ordinary income tax rates if held for one year or less.
You need to know your cost basis to calculate your taxable gain, and that means the price paid plus any costs, fees, and commissions involved with that purchase.
There are specific tax rules regarding personal use of collectibles, precious metal ETFs, and collectibles donated to charity.
What Is a Collectible?
Let’s start by defining what a collectible is. The IRS leaves the definition open-ended, as a collectible is defined as “any tangible personal property that the IRS determines is a collectible”. The IRS does give specific examples of collectibles including:
any work of art
any rug or antique
any metal or gem
any stamp or coin
any alcoholic beverage
The idea behind collectibles is they have specific intrinsic value. If an item carries additional value based on its rarity in a market, it will likely be considered a collectible for tax purposes.
Calculating Your Basis:
When figuring out your tax obligation for selling a collectible, you need to figure out your basis. This is the non-taxable portion of your collectible, and it is often equal to what you paid for the item. If you bought the collectible, your taxable basis is the purchase price of the asset plus any associated broker and transaction fees.
If you inherited the collectible, the basis is the fair market value of the item at the time of inheritance. Some collectibles warrant an appraisal if the fair market value of the item is not readily known or easily determinable. If the collectible has not been appraised, the fair market value also can be determined by comps (i.e., the price of similar items). The problem with using comps is they doesn’t take into account the condition of your collectible or the collectible being used for comparison.
Once you establish your basis, subtract the basis from the sale price and you will have your net capital gain.
A higher basis is more advantageous for taxpayers. A taxpayer’s tax liability is smaller as the basis of an item increases or is higher.
Example of Calculation
Let’s say you purchased an antique table. The price of the table was $5,000, the associated broker fee was $300, and you’ve spent an additional $1,000 to restore the collectible since the acquisition. Your cost basis in the antique table is $6,300. Should you sell the table for $7,500, the IRS requires you to report the $1,200 ($7,500 – $6,300) profit.
Say you inherited the table instead. You paid $0 for the table, did not pay any broker fees, and still spent $1,000 to restore the table. Although you’ve only spent $1,000 on the table, your basis will be higher since you’ve inherited the item. Should an appraisal of the item record the value of the table as $7,000, your sale for $7,500 will result in $500 of taxable income.
It’s common for someone’s cost basis to be different than the fair market value of a collectible. This is especially true if someone purchased the collectible a long time ago or if demand for the item has substantially increased since the time of purchase.
Collectibles and Capital Gains
The capital gains tax on your net gain from selling a collectible is capped at a rate of 28%. You may also be subject to a 3.8% net investment income tax, depending on your adjusted gross income (AGI).
Provided you hold the piece for more than one year, you won’t pay more than that amount, even if you’re in a high tax bracket. Note that the rate on collectibles is considerably higher than the tax rate on most long-term capital gains, which is an average of 15% for most taxpayers, according to the IRS.The IRS categorizes non-fungible tokens (NFTs) as digital assets, which are taxed at regular capital gains rates.
The tax rate is set at such a relatively high level because the government disincentives buying and selling of collectibles. Unlike business innovations or comprehensive employee training, collectibles aren’t real economic drivers. In short, the government would prefer capital be put toward efforts that help grow gross domestic product (GDP).
If you sell a collectible in less than one year, it will be taxed as ordinary income.
This could be advantageous if your income tax bracket is less than 28%.
If you buy and sell gold or silver, or gold and silver exchange-traded funds, it will be taxed as a collectible (since gold and silver are considered collectibles).
If you use a collectible for personal use (hanging a painting on a wall in your home as opposed to keeping it in storage), then you will not be able to claim a capital loss.
There are provisions in place for the donation of collectibles to a charity. Items with a value greater than $5,000 must be appraised, and the appraiser along with the charity must sign IRS Form 8283. Taxpayers may receive a deduction for the fair market value of the item provided the charity does not dispose the item within three years of receipt.
Do I Owe Taxes When I Sell Collectibles?
Taxpayers often have a tax obligation after the sale of a collectible. If you sold the item for more than its fair market value or its cost basis (depending on how you acquired the item), you will likely be assessed taxes.
What Is the Tax Rate for Collectibles?
Collectibles held for more than one year are assessed long-term capital gains taxes that are capped at 28%. Collectibles held for less than one year are taxed the same as ordinary income.
What Is the Basis for Collectibles?
Your basis depends on how you obtained the collectible. If you bought it, your basis is often the price you paid, broker fees, and any restoration costs incurred. If you inherited it, your basis is often an appraised value equal to its current fair market value.
The Bottom Line
The sale of collectibles can lead to a cash windfall, but the resulting tax obligation may be substantial. If you’re still not sure or comfortable about the sale of a collectible (or collectibles) and you want to minimize your tax obligation, consult a tax advisor.
Correction—March 8, 2022: A previous version of this article incorrectly specified that all collectibles were taxed at 28%, rather than 28% being the maximum tax.
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